The Tax Refund Myth

  • By Klayman & Company
  • 16 Aug, 2017

A “tax refund” is really just the CRA giving you back your own money. 

“The government gave me money back” is a common phrase often heard after the April 30 or June 15 filing deadline. The truth is that the government is not being charitable; it is only refunding the tax that you or your employer had overpaid throughout the year.

Because the rate of tax withheld at source throughout the year may be different than the tax rate applicable to your actual taxable income (after taking into consideration all other income and deductions), you might have remitted more money to Ottawa than was necessary. Your "tax refund" is the difference between your remittances and your actual tax liability.

One of the biggest misconceptions is that, upon filing of their personal income tax returns, people with a lower income will likely receive a tax refund while people with a higher income will usually end up owing tax. This is not necessarily true because the tax refund/liability is not based on your income level but rather on the difference between the remittances paid compared to the actual tax liability.

How It Works

For example, assume Mrs. A, who normally earns a $200,000 annual salary, only worked six months during 2016. Mrs. A’s employer would have withheld taxes based on the $200,000. However, since Mrs. A worked only half the year, her actual 2016 income was $100,000. Because the tax remittances calculated on $200,000 were higher than the actual taxes applicable on the $100,000, Mrs. A will receive a tax refund.

On the other hand, assume Mr. B has two jobs each paying $30,000 throughout 2016. Mr. B’s employers would have withheld taxes based on Mr. B’s actual income of $30,000 from each of them. However, Mr. B’s actual income for 2016 was $60,000. Because the sum of the two tax remittances calculated on $30,000 earned from each employer would be lower than the actual taxes applicable on the $60,000, Mr. B will likely have to pay additional taxes.

In order to avoid such differences between the withheld taxes and the actual tax liability, everyone should review their current personal and taxable income situation to determine whether they can reduce withholding taxes to minimize the cash advance provided to the treasury. It is very important that your employer be aware of any other sources of income you may have or other deductions to which you are entitled, so that all of it can be considered when determining the appropriate amounts to be withheld.

What Should I Consider?

Here are some of the personal tax credits that your employer should consider in reducing the amount of withholding taxes to be remitted:

  • Are you eligible for an age amount (e.g., tax credit available for those 65 or older)?
  • Are you eligible for a spousal credit (i.e., if the spouse’s income is under the basic personal amount)?
  • Are you (or your children) enrolled at a university, college or other educational institution and are eligible to receive tuition credits?
  • Are you (or your dependants) qualified for a disability amount?

Before you approach your employer to reduce source deductions, consider the total of all deductions allowed as well as your individual tax bracket. On the one hand, there is little to be gained in cash flow savings if the overall taxable income reduction is miniscule. On the other hand, if the gain could be substantial, taxpayers should make every effort to minimize the tax dollars advanced to the Canada Revenue Agency (CRA). At the same time, taxpayers should understand the rules and regulations that accompany an attempt to reduce deductions at the source.

Make sure your TD1 information is correct.

Be Informed

The CRA requires that employees complete a TD1 form when starting employment. Make sure the information provided is correct from the start to enable payroll to make the correct calculations for source deductions. Correct information regarding spousal amounts or caregiver amounts makes a difference to non-refundable tax credits and the calculation of source deductions. If life circumstances have changed, submit a revised TD1 form.

CRA Form T1213

Should you have significant deductions available in any given year to reduce the withholding taxes at source, file a “Form T1213 Request to Reduce Tax Deductions at Source” (see CRA website for the forms). Regulations require that this form be submitted each year; however, if similar circumstances will exist for two consecutive years, you can apply for two years as long as you submit one T1213 form for each year. Given the CRA’s response time, it may be advisable to consider the two-year option and provide such data to the CRA before the end of 2017 so that it will become effective January 1, 2018. When you receive the letter of approval from the CRA, submit it to your employer to reduce the source deduction amount or adjust your instalment payments as required. Some of the tax deductions that can reduce the tax withholding at source are listed below:

  • Will you be contributing a lot of money to your RRSP for the next few years?
  • Are there significant child care expenses?
  • Are you making any support payments?
  • Does your employee contract or self-employment require you to pay for work-related expenses such as vehicle, lodging, supplies, or tools?
  • Will you split pension income with a spouse in a lower income bracket?
  • Are you anticipating costly moving expenses when moving for employment reasons?
  • Do you have non-capital losses you can carry forward for a number of years?
  • Do you pay significant brokerage fees to manage your investment portfolio?
  • Have you borrowed for investment purposes?
  • Have you purchased rental properties that will create rental losses for the foreseeable future?

CRA Interest Percentages

In the event you do not make sufficient source deductions or instalment payments, the CRA will charge you with interest and penalties of 5% on overdue income taxes. If you are overzealous and overcontribute to the treasury, the prescribed rate for refunds of overpaid tax is 3% for individuals.

Example

A single adult in Ontario earning $100,000 employment income had source reductions for 2016 of approximately $24,829 or $2,069 per month. If the anticipated RRSP contribution for 2016 was $12,000, the tax liability would have been $19,763 (using 2016 tables), an annual cash flow reduction to the CRA of $5,066 ($422/month).

If other factors increased the overall deductions to $20,000, total source deductions drop to $17,127 and thus reduce cash outflow to the CRA to approximately $7,702 ($642/month). 

By filing the T1213 form, the foregoing scenario anticipates two-year reductions in cash outflow to the CRA ranging from $10,132 to $15,404. Rather than waiting for a lump-sum refund at the time of filing, these funds could be received each month and used to pay down a mortgage, reduce high-interest debt or invest in additional RRSP, Tax Free Savings Account (TFSA) or make other investments.

Keep Cash Advances to a Minimum 

As personal debt and the cost of living rise, taxpayers should consider the financial advantages of ensuring cash advances to the treasury meet their obligations and nothing more. The advantages of reviewing the impending 2018 and 2019 taxation years with your CPA and forecasting the potential to put money in your pocket sooner, rather than later, is certainly worthwhile.

By Klayman & Company 16 Aug, 2017

Because lighting, heating and cooling represent 19%-25% of the cost of operating a commercial business, control of energy costs is essential to improving profit margins. A reduction of even 10% in these costs can produce a significant improvement. But, because Canada is located in a part of the world where temperatures can range from 40C below zero to 35C above, it is inevitably expensive to keep internal temperatures at levels needed to maintain comfortable working conditions through the changing seasons.

By Klayman & Company 16 Aug, 2017

Setting the price point for your product or service is not simply the process of determining the cost of production then adding a mark-up. It is more a matter of understanding the price the consumer will accept as the value of your product or service and keeping the costs of production to a level that will give you a profit at that price.

By Klayman & Company 16 Aug, 2017

The significant rise in the cost of equipment, vehicles, real estate, and inventory has prompted many businesses to increase business debt. Low interest rates, combined with the ability to obtain larger loans with extended payment terms, have allowed businesses to operate in a “business as usual” mode with less consideration for the actual cost of borrowing.

To give some idea of the effect of even low interest rates on an owner-managed business, the following key elements of most businesses have been put forward as an example of the effect of interest costs on a business. The effect of domestic borrowing has been added to show the full impact of current interest rates on the owner-manager. Since lending rates vary widely depending on a variety of factors such as risk, item to be funded and the term, and are usually negotiated, the interest rates used below have been chosen at random from Internet sources; calculations are approximate and for illustrative purposes only . All loans have been made effective June 1, 2017.

  • Commercial mortgage: $600,000 over 25 years at 3%
  • Two work vehicles: $120,000 financed over five years at 6%
  • Equipment loan: $200,000 financed over five years at 5%
  • Operating line of credit: $50,000 at 3% a year
  • Credit card debt: $10,000 at 15% a year on the outstanding balance

By Klayman & Company 16 Aug, 2017

For those already thinking about their 2017 income taxes, the following summarizes some of the changes from 2016.

By Klayman & Company 16 Aug, 2017

The use of cut-out and email coupons to create consumer awareness of your business and your products has been around for a long time, but their effect on your revenue and profit is notoriously hard to measure. Some marketers are now hoping to get around this problem by offering WiFi services to their in-store customers to get them to stay within the store environment. This idea is based on the well-tested principle that the longer a person stays in the store, the more likely they are to buy something. In fact, a recent survey has shown that 62% of customers will linger longer in shopping environments that provide free WiFi. The same study showed that half of those customers actually spend more money while they remain in the store.

By Klayman & Company 16 Aug, 2017

“The government gave me money back” is a common phrase often heard after the April 30 or June 15 filing deadline. The truth is that the government is not being charitable; it is only refunding the tax that you or your employer had overpaid throughout the year.

Because the rate of tax withheld at source throughout the year may be different than the tax rate applicable to your actual taxable income (after taking into consideration all other income and deductions), you might have remitted more money to Ottawa than was necessary. Your "tax refund" is the difference between your remittances and your actual tax liability.

One of the biggest misconceptions is that, upon filing of their personal income tax returns, people with a lower income will likely receive a tax refund while people with a higher income will usually end up owing tax. This is not necessarily true because the tax refund/liability is not based on your income level but rather on the difference between the remittances paid compared to the actual tax liability.

By Klayman & Company 16 Aug, 2017

Fred Tarasoff loves music. In fact, he used to own a record store, but had to go out of business in 1989 in large part because of inventory losses through shoplifting. Then he was assaulted by a shoplifter while he was running a health food store. Since that time, he has devoted himself to researching shoplifting and the retail industry in order to develop training programs to prevent and detect shoplifting. He currently works closely with law enforcement, industry associations and security firms to fight this crime. In the course of this work, Mr. Tarasoff has developed a simple way to calculate the losses suffered from shoplifting.

According to Mr. Tarasoff, even if your business has excellent controls, you can expect losses will approximate 1% of gross sales. Thus, if your retail store sells $600,000 a year, at least $6,000 will be missing from your sales figure. But, if your business does not have good controls, losses could be as high as 8% or $48,000 on $600,000 of gross sales. If your store works on a 20% gross margin your business is out $38,400 (i.e., 80% the sales loss of $48,000).

By Klayman & Company 16 Aug, 2017

Liberalisation of Canada's marijuana laws appears to be imminent. The Cannabis Act is currently expected to become law in 2018 and will decriminalize certain activities and make marijuana more widely available under a controlled production, distribution and sales system. Whether or not you agree with the intent of the proposed Cannabis Act , the loosening of the laws governing the sale and use of marijuana raises important questions for businesses regarding health, safety and legal liability.  

Most provincial and territorial occupational health and safety regulations require an employer to take all reasonable means to ensure the protection of their workers. The employer also has a reasonable expectation that employees should not be impaired on the job. The question then becomes when are employees impaired and whether, if they believe themselves to be impaired, they are required to inform their employer.

By Klayman & Company 21 Mar, 2017

Our need for passwords to access everything in our life has become pervasive. Every agency, every computer, every credit card, every smartphone requires an exponential explosion of letters, numbers, and symbols to secure all information from hackers, whether it is personal data or corporate information.

To complicate matters, it is no longer permissible (or advisable) on many sites to use a simple password that is easy to remember, such as a word or name. Instead you must create a password with numbers, special characters, upper and lower case letters, and a minimum length.

One study suggests the average individual has at least 25 Internet-accessible accounts with passwords, while other sources suggest that number could be substantially higher. Is it any wonder that most individuals will, whenever possible, assign the same password to as many accounts as they can? Hackers know this and once they compromise one account, it often doesn’t take long to gain access to your other accounts.

Use Different Passwords

The best means of protecting your personal information is to use a different, unguessable password for every account. Most password management software includes the ability to generate passwords, and then store them for you. The beauty of using a password manager is that you only have to remember one password to access all of the passwords you need to remember.

High-end password managers support multiple languages and are able to tie in passwords with hundreds of websites. Two-factor authentication is usually required (and should be!) to protect data in the event someone finds your password and logs in on your device or tries to log in on a new device that is not registered.

Set Up

Setting up a password management app generally requires you to download and install the software and add browser extensions for each browser you use. If you use multiple devices, you will need to load the app on each one. To set up an account, you will use your email address and will need to come up with a master password or passphrase (i.e., one long, hard-to-guess password to rule them all).

One primary password gives you access to all your passwords.

After creating the master password comes the arduous task of entering data about the various accounts or sites you need to access.

Some password managers will import your user names, auto fill standard information, and pull passwords from your existing browsers, although, if you haven’t saved the passwords in the browser, the data will have to be entered manually. The password manager will typically assess the strength of your current password, and prompt you to generate a new, stronger password (typically at least 16 characters) for that site. Experts also suggest that you revisit your security questions and determine whether you want to change them as an added security measure.

Don’t Forget Your Master Password

Unlike a typical website with a “forgot password?” feature, the master password is often not recoverable in that way. There are very few password manager systems that provide a “hint” to enable you to try to rebuild your password. For most, you will have to start all over and rebuild the passwords for every site and every account keystroke by keystroke. Commit your master password to memory; do not click “remember my password” for your master password; typing it often will help you to remember it.

Cost Factor

Most of the providers of password manager software provide free trial subscriptions; several offer a limited version of their software for free, with the ability to upgrade for additional features and support for an annual fee. Freebie options aside, password manager services typically range in price from $20 to $60 annually.

In Case of Emergency …

If a person is incapacitated or dead it will be impossible for someone else to access the accounts. It is important to ensure that the software used provides the ability to set up an emergency contact to inherit your passwords. Some providers allow you to set a waiting period before a trusted individual can access the codes so that the accounts cannot be accessed while you are alive. If someone tries to access your accounts, you will be notified by email. Other providers allow you to designate specific accounts, such as the business account, that can be accessed by specific people, such as your business partner, or to designate personal accounts to a trusted relative or friend.

Large Benefit for Small Cost

Strong passwords are a necessity for everyone, and we all tend to use passwords that are easy to crack; this makes us easy targets for nefarious people looking to steal our information, money or identities. Using a password manager is an inexpensive way of ensuring access to the ever-growing number of sites we must access in our interconnected world while making it difficult for anyone else to gain access to our personal and financial information.

By Klayman & Company 21 Mar, 2017

No matter what the economic conditions, some business worries never go away. Here are a few tips on how to handle some of these eternal problems.

Cash Flow

Customers will continue to extend payments over 90 days.

Understand your cash flow. At the end of each week, review accounts receivable, and accounts payable and make sure you know what you must pay in withholding taxes. Do not use your source deductions to pay suppliers unless those deductions are actually in the bank. Send requests for funds to suppliers before the end of the month.

Owner-Manager Fatigue

Overworked and underpaid will continue to be the mantra.

Learn to pace yourself. Work to make money not save money. Work at what you do best and delegate the rest. Consider that if you work 2,000 hours per year and your business has sales of $400,000, you are effectively generating $200 of revenue per hour. Ask yourself why you are trying to learn how to do something a subcontractor can do in a day.

Maintaining Customer Base

Maintaining clients while working to get new ones is going to be a challenge.

In tough times, even long-time customers may ask you to cut your costs or they may cut back their orders. Review the profit on your best customers, not just their sales volume. Visit the customer and find out their expectations for the coming year. Consider limiting services to marginally profitable customers.

Employers

Finding and keeping good employees is never easy.

Older employees may retire and good employees may leave. New, inexperienced employees do not solve short-term problems.

Happy employees are loyal and productive. Be approachable. Let employees tell you what they need. Employees always appreciate a bigger pay cheque, but a good working environment and feeling valued will also go a long way to keeping employees.

Overhead

The cost of everything will continue to rise.

Capital asset costs, fuel, property taxes, light, heat, power, insurance, and maintenance will continue to rise and put pressure on your cash flow. The same cost pressures will also affect the standard of living of your own family and the families of your employees.

Evaluate all aspects of business costs and perks. Look at discounts, value added and other incentives provided to clients. Review perks to employees and determine whether there are more economical solutions that will retain the good will of the employees but not put more pressure on your cash flow.

Technology and Changing Demands

Keeping up with new developments will be a challenge .

Changes in technology, process, or client needs require training and financing to transition from the tried and true. Budget for the inevitable or you risk being outflanked by the competition.

Social media is changing the entire marketing process.

Marketing and Advertising

Connecting with customers will continue to be a challenge.

Maximizing your brand is difficult at the best of times; unfortunately, social media is making the entire marketing process even more problematic. Analyze your market and decide whether the best way to reach potential customers is: one-to-one contact, social media, online advertising, television, radio, newspapers, or magazines. You may find that more and more dollars have to be spent to create a cross-media presence that provides the same information without any guarantee of a return on investment.

Consider a short-term contract with a marketing specialist to review your company and its client base to help determine the best combination of media to reach your target market. Then, develop a plan to deploy your advertising budget to the appropriate media.

Maintaining Control

Managing all sectors of the business will continue to be a challenge.

Managing sales, manufacturing, ordering, marketing, human resources and administration as well as dealing with the considerable number of regulatory agencies will continue to become more complex. Trying to do everything yourself will undoubtedly lead to failure in one or more areas.

Control your business by managing rather than doing. Find the best person to run each particular part of the business. Define their responsibilities with a detailed and accurate job description and schedule regular reports. This will enable you to understand what is happening within the organization, solve problems and improve operations. Have faith in your subordinates.

Regulations

Red tape is and will continue to be the nemesis of small business.

Research suggests that these compliance issues consume eight weeks of employee time per year.

Because collecting and providing information to governments and regulators cannot be avoided, owner-managers should institute in-house procedures and write manuals. Reduce the use of employee time and associated costs by purchasing reporting software. If you do not have in-house expertise, arrange for a third party to prepare regular reports. Filing reports correctly and on time eliminates the cost and stress that follows from non-compliance.

Plan Ahead

The size and complexity of these and similar issues will move forward in lockstep with the business. Analyzing each potential conflict area and developing a process to stave off potential problems is an excellent offensive tactic that will lessen the cost and uncertainty of moving forward for the balance of 2017 and beyond.

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